Explaining Gold to Your Advisor

Having trouble explaining to your financial advisor why you might want
to make a gold investment today?

Try starting by noting that, whatever your advisor's stance on gold today
- long, short or indifferent - the recent run towards $2000 per ounce begs
the question: How in the hell did this unyielding, relatively useless lump
of metal get here?

Gold has more than doubled in price since the first interbank credit crunch,
and it's only attracted more headlines, and more investment Dollars, as the
crisis mutates. But gold had already trebled by mid-2007 from its 2001 low.
And if that was a warning of trouble ahead, then investors and savers (not
to mention their advisors) might ask what the 2011 rise signals to date.

The bull market's birth, a decade ago, has been variously attributed to gold's "trinket
price" base, the geopolitical fears sparked by Y2K and then 9/11, cycled investment
flows as the Tech Bubble burst, and the acceleration of the United States'
twin deficits. In terms of both consumer goods and business assets, however,
gold now stands well above its historic averages. Next year's US presidential
campaigns may see gold politicized as the hollow call for a Gold Standard grows.
(Hollow how? Here's
how...) But for now, gold
investment remains a monetary, not political phenomenon, as the daily spot
price's lacklustre response to both 2008's South Ossetia stand-off and the
2011 Arab Spring show.

More fundamental was the 1999 announcement - spurred by the UK's cack-handed
disposals starting that summer - that European central banks would in future
cap their joint gold sales. That gave the market fore-warning of what by then
had become a huge source of supply (and a source that has since
dried up entirely). It was in good part fed to the market through forward
sales by gold mining producers,
switching to a source of demand as the price of gold rose and miners scrambled
to buy back their shorts, just about getting themselves even by 2010.

New mining output itself took until 2010 to breach its 2001 peak. That left
so-called "scrap" flows - especially from previously unresponsive jewellery
owners in North America and Europe - to meet rising demand, most
notably from emerging Asia. Last year's demand from India and China, the
world's two largest gold consumers, was twice the size of demand from Europe,
the Middle East and North America combined, as economic growth released millions
more families to start building discretionary savings. Indian households spent
a record 2.6% of GDP on physical gold in 2010. As a proportion of China's annual
household savings, private gold
investment (whether in coin, bar or jewelry) has more than doubled since
2001 to reach almost 2%. Anyone expecting a "gold mania" amongst US or European
investors, therefore, may therefore be looking in the wrong hemisphere.

As recently as 2004, some Western gold-market analysts expected rising incomes
in Asia to lead to substitution
for consumer items and financial services. But it took the global downturn
post-Lehmans, coupled with low demand outside the wedding and festival seasons,
to make India briefly a net exporter of gold in early 2009 for the first time
since the Great Depression. Gold retains deep religious and social significance
across the sub-continent, and is similarly deemed an auspicious purchase by
consumers in China. There, deregulation of the gold market, starting in 2002
with the launch of the Shanghai Gold Exchange, marks what looks a conscious
effort by Beijing to diversify the nation's savings. News of fresh hoarding
by the PBoC is hotly anticipated, but new private demand has matched total
official reserves in the last two years alone.

While the motives for Asian and Western gold
investment might seem very different, however, one critical factor is
common to both: low to negative real rates of interest. Sub-zero returns
on cash are also the common denominator of the 21st century's 600 per cent
gains to date and the 1970s' bull market. Because when cash loses value year
after year, savers are forced to seek more reliable homes for their wealth.
Rare, incorruptible and indestructible gold remains an obvious alternative,
aided by 5,000 years' use as a store of value. It has come to look increasingly
attractive as debt instruments fail to pay. UK households, for instance,
shaken first by Northern Rock and then by quantitative easing, have now suffered
bank deposit rates more negative after inflation than at any time since 1978.
Western policy-makers are plainly constrained, in the face of rising inflation,
by national debt levels. Central bankers in Asia are similarly hampered by
the political imperative to maintain near double-digit growth.

Two global equity slumps, plus the US real-estate bust, have only helped
the "case for gold" reach a widening market since 2001. So too has easier access
to gold-price exposure, notably led by New York's SPDR Gold Trust and other
exchange-traded funds worldwide. ETFs have
enabled US mutual funds in particular to track the metal, because they cannot
own the physical asset by dint of their own charters. The Gold Trust's brief
spot as the world's largest ETF by
market cap this summer led many pundits to declare gold a bubble (a claim first
made to me at the start of 2009, some $1000 ago). Technically today, gold's
recent price rise is nothing out-of-the-ordinary. Measured against its standard
deviation of the last 40 years, the year-on-year change remains well below
the "2-sigma" reading seen at the top of acknowledged bubbles in Japanese stocks,
the Nasdaq, and most recently US housing.

Portfolio allocations to gold
investment also remain low historically, most especially compared to
the 20th century's two economic depressions, when preservation of capital
last overtook considerations of growth. The mid-1930s and early 1980s saw
physical gold account for perhaps one-fifth
and one-quarter respectively of all global financial wealth. Today, that
figure stands nearer four per cent. US gold
investment flows over the last decade account for less than 1% of household
wealth at current prices.

So what are the risks, and how might things change? Between 1980 and 2000,
gold lost more than four-fifths of its purchasing power, even though inflation
twice topped double-digits. Ten-year US Treasury bonds, however, paid a real
yield of four per cent per year on average, and UK savers enjoyed the strongest
real rates since the classical Gold Standard. What killed gold's last bull
market looks a long way off yet. Nor can the miserable investment backdrop
that's nurtured and sustained it to date be discounted - not if your financial
advisor understands how serious you are about defending your savings.

Formerly City correspondent for The Daily Reckoning in London and head of
editorial at the UK's leading financial advisory for private investors, Adrian
Ash is the head of research at BullionVault,
where you can buy gold
today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

About BullionVault

BullionVault is the
secure, low-cost gold and silver exchange for private investors. It enables
you to buy and sell professional-grade bullion at live prices online, storing
your physical property in market-accredited, non-bank vaults in London, New
York and Zurich.

By February 2011, less than six years after launch, more than 21,000 people
from 97 countries used BullionVault,
owning well over 21 tonnes of physical gold (US$940m) and 140 tonnes of physical
silver (US$129m) as their outright property. There is no minimum investment
and users can deal as little as one gram at a time. Each user's unique holding
is proven, each day, by the public reconciliation of client property with formal
bullion-market bar lists.

BullionVault is a
full member of professional trade body the London Bullion Market Association
(LBMA). Its innovative online platform was recognized in 2009 by the UK's prestigious
Queen's Awards for Enterprise. In June 2010, the gold industry's key market-development
body the World Gold Council (www.gold.org)
joined with the internet and technology fund Augmentum Capital, which is backed
by the London listed Rothschild Investment Trust (RIT Capital Partners), in
making an $18.8 million (£12.5m) investment in the business.

Please Note: This article is to inform your thinking, not lead it.
Only you can decide the best place for your money, and any decision you make
will put your money at risk. Information or data included here may have already
been overtaken by events - and must be verified elsewhere - should you choose
to act on it.